Denbury Resources, Inc. Q3 2009 Earnings Conference Call

Nov. 5.09 | About: Denbury Resources (DNR)

Denbury Resources, Inc. (NYSE:DNR)

Q3 2009 Earnings Call

November 5, 2009 12:00 p.m. ET

Executives

Phil Rykhoek - CEO

Mark Allen - SVP and CFO

Tracy Evans - President and COO

Bob Cornelius - SVP, Operations

Analysts

Mike Scialla - Thomas Weisel Partners

Nicholas Pope - Dahlman Rose

Andrew Coleman - UBS

Noel Parks - Ladenburg Thalmann

Eric Hagen - Lazard Capital Markets

Presentation

Operator

Good afternoon and welcome to the third quarter 2009 earnings release conference call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note, this event is being recorded. I would now like to turn the conference over to Mr. Phil Rykhoek. Please go ahead, sir.

Phil Rykhoek

Thank you, Amy. Welcome to Denbury's third quarter earnings conference call. While it's been an eventful week, today we are reporting and focusing on Denbury's third quarter results. You should also be aware that there could be some forward-looking information in this report, and so you might want to check our SEC filings regarding that. With me today I have Tracy Evans, our President and COO; Mark Allen, our Senior Vice President and CFO; and Bob Cornelius, our Senior Vice President of Operations.

As disclosed in the press release, our clean or adjusted net income this quarter was $40.7 million, slightly better than our second quarter results on the same basis, but only about a third of the comparable adjusted net income a year ago, the difference primarily due to the lower commodity prices. While our tertiary production is slightly below target this quarter, the tertiary production response during the last couple weeks has been strong, putting us on a path to end 2009 with 25% tertiary growth year-over-year.

Good things are happening at Denbury. Our CO2 pipeline projects are moving forward. We're about to start injections at Delhi. Our prospects at Jackson Dome are looking good. And we plan to get started on our Texas Gulf Coast EOR projects next year after the Green Pipeline arrives. We've also locked in some additional hedges in 2011 because of the pending acquisition of Encore.

Well, I'll let each of the guys to give you more details and operational updates, starting with Mark's review of the financials. Mark?

Mark Allen

Thanks, Phil. As reported in our press release, we had net income for the third quarter of $26.9 million, which included a non-cash charge for the change in fair value of our commodity derivative contracts of $22.3 million, or $13.8 million after taxes. When you adjust for the non-cash fair value adjustments, we had net income in the third quarter of $40.7 million or $0.16 per share.

This is slightly higher than our last quarter results which after adjusted to remove the charges associated with the fair value changes of our derivative contracts, and special compensation charge, our net income would have been approximately $39.7 million or $0.16 per share. As we have typically done I will primarily focus on the sequential results of the second and third quarters of 2009, rather than the comparative third quarter of 2008. During the third quarter of 2009, our tertiary production was slightly higher than Q2.

But our production decreased on an overall basis due to the sale of 60% of our Barnett Shale properties. The Barnett Shale production for the remaining portion of the property sale that occurred in mid-July added approximately 350 BOEs per day to our third quarter production. Bob is going to discuss more about our production in a moment. Our average oil price received for the quarter including derivative settlements was $70.54 per barrel in Q3, as compared to $66.70 per barrel in Q2.

But if derivative settlements are excluded, our average oil price received for the third quarter was $64.77 per barrel as compared to $54.53 per barrel in Q2. Our NYMEX oil price differential improved slightly during the third quarter from approximately $5.30 per barrel below NYMEX in Q2 to$3.47 per barrel below NYMEX in Q3. That is largely due to the impact of lower natural gas liquids in our oil production mix as a result of the Barnett Shale sale.

Our total corporate lease operating costs were down slightly, approximately $360,000 Q2 to Q3, due primarily to the Barnett property sale. On a per BOE basis, our overall lease operating costs increased from $17.59 per BOE in Q2 to $21.22 per BOE in Q3, also primarily due to the Barnett Shale property sale and higher BOE costs in our tertiary operations in Q3. As I mentioned last quarter, our LOE per BOE in Q2 on a pro forma basis for the Barnett sale would have been $19.90 as compared to $21.22 per BOE this quarter.

That increase on a per BOE basis is due to increased work over expense, higher purchases and cost of CO2, and only slightly higher volumes due to the facility downtime, as Bob will more fully discuss. G&A expenses decreased by $9.1 million from Q2 levels due primarily to the $10 million compensation charge under our Founder's Retirement Agreement with Gareth Roberts related to his retirement as CEO in the second quarter. Again this quarter we recognized compensation expense related to the Genesis management compensation awards of approximately $3.6 million, approximately $600,000 higher than the prior quarter.

As a result of lower production for the Barnett Shale sale, our G&A expense on a per BOE basis will likely to be very similar to our current quarter results for the remainder of the year. However, on top of this, we will have transaction costs related to the Encore acquisition that we will incur and that will run through our G&A expense. As a footnote, the relatively new accounting rules relate to acquisition costs, in case you aren't familiar with them, requires us to expense our acquisition transaction costs.

At this time it is difficult to predict the timing and total amount of these costs that will be added over the next two quarters, but could likely add significant cost to our G&A over the next six months. Interest expense decreased sequentially from $14.9 million to $9.9 million, primarily related to more capitalized interest this quarter. Capitalized interest was $20.9 million this quarter as compared to $15.5 million in the prior quarter. Going forward, we expect that our capitalized interest will continue to remain roughly the same from as Q3, until we put the Green Pipeline in service.

Our debt at September 30 consisted of approximately $951 million of senior sub notes and $20 million of bank debt, as we have paid down most of our bank debt with the proceeds from the Barnett sale. We will have some bank debt outstanding during Q4 to cover timing of capital expenditures, generally around $50 million to $70 million drawn. But assuming we are able to complete our equipment leasing program for the remaining $55 million by the end of 2009, we should end the year with not much drawn on our credit line. This also ties in with our capital budget of $750 million for 2009, which as we have said previously is net of capitalized interest and net of equipment leases.

To Q3, we have recorded approximately $833 million of cash used for capital expenditures. This includes $49 million in capitalized interest and $44 million that was subsequently leased in sale-leaseback transactions. In addition, our liabilities for capital expenditures were approximately $55 million lower at September 30, than at December 31, representing cash outflows related to our capital actually incurred at December 31. When you net these together, you will see that we actually incurred $685 million of our $750 million, and we have roughly $55 million left to go on sale-leasebacks for the remainder of 2009, which if we complete leaves us a $120 million in capital spending in Q4.

If we do not get all the remaining sale-leasebacks complete by the end of 2009, we will likely carry those over into 2010. Our DD&A for oil and gas properties decreased on an absolute basis as a result of the Barnett property sale; but increased on a per BOE basis from Q2 as a result of lower production in Q3. With regard to income taxes, although we do not expect a significant change in our overall tax rate for the full year, for the current quarter we did have a slightly lower rate as a result of return to provision revisions and revisions from the Barnett property sale, thus flipping some of our taxes from current to deferred.

With that, I'll pass it to Bob.

Bob Cornelius

Thank you, Mark. I'll give you a quick update of our major projects, production rates, and enhanced oil recovery projects. As reported in the press release, Denbury's third quarter production averaged 42,659 net BOEs per day, an 11% increase from the third quarter of 2008 production. That's after adjusting for the Barnett Shale sale of assets. On our CO2 enhanced oil production, it averaged 24,347 net BOEs per day, a 23% increase over the third quarter of 2008.

During the third quarter, we conducted well operations and facility expansions in several of our key fields to prepare them for future production increases or to allow for improved facility run times. Now, this work impacted our quarter production rates, as the work in some fields required the reduction of CO2 injection rates or, in the case of Mallalieu and Tinsley, recycle facility expansion required a suspension of operations for several days. All these facility improvements were designed for future production growth or improved operations. In Phase 1, we operate five major field areas. Those are Little Creek area, Mallalieu, Brookhaven, McComb-Smithdale area, and Lockhart Crossing.

During the third quarter, production increased occurred at Lockhart Crossing and in McComb. Lockhart Crossing led the Phase 1 production group with a production increase of 26% or 184 net BOEs per day for the quarter. McComb-Smithdale area showed a production increase for the third sequential quarter. Brookhaven had an average production rate of 3,397 net BOEs per day for the quarter, decreased 2% from the second quarter rates. Brookhaven's production was down slightly from the quarter due to the injection withdrawal ratio being less than one in prior quarters. Now to correct the low injection withdrawal ratio, we converted two wells to injection and increased CO2 injection rates in all most wells.

In the CO2 EOR reservoir it's important to maintain positive injection to it’s withdraw ratios and to maintain the bottom hole pressures. And now the team is focused on that goal, and we are seeing improvement at Brookhaven. As discussed, Mallalieu, we had an extended three production day shut-in period for facility expansion. The team added compression to increase our recycle capacity from 160 million cubic feet a day to over 230 million cubic feet a day. Also, we added improved water handling or fluid handling management, and both of these tasks should improve operations and reduce downtime at Mallalieu.

The remaining operating areas Phases 2, 3, and 4 all experienced production increases during the quarter. Phase 2, consisting of Eucutta, Soso, Martinville, and Heidelberg, showed a CO2 production increase of 6% for the period or 495 net BOEs per day from quarter-to-quarter. Soso and Heidelberg were the two units that exhibited the highest production increase. Eucutta's average production rate slipped 2% from second quarter levels due to curtailment of CO2 injection. Injection rates were often curtailed when a work over is performed on offsetting injection wells.

We attempted to reduce the bottom hole pressure during a work over, so you have to reduce the injection rates. That work is now completed and the reservoir is taking full injection volumes. At Soso, production facilities were modified during the third quarter to handle additional produced water. Now the improved separation capabilities and the addition of jet pumps on non-responding producing wells resulted in an 8.6 production increase from quarter to quarter.

Soso's third quarter production rate averaged 2,813 net BOEs per day, and we are expecting production to continue to increase through the end of the year. Heidelberg, the newest EOR field in Phase 2, continues to respond better than forecast. Third quarter production increased 231% over the period, with an average production rate of 828 net BOEs per day. The initial phase of Heidelberg is complete and fully developed. It has operating 17 producers and eight injections.

During the third quarter, the second phase of the unit expansion was completed, with a facilities expansion and increased injection. The team has experienced some early tertiary response already. And based on the first group of wells, Heidelberg should continue to improve through the fourth quarter. At Tinsley Field, of course it's our largest tertiary flood today. Production increased an average of 156 net BOEs per day or 4.5% quarter-to-quarter, to an average rate of 3,558 net BOEs per day.

During September and the first few days of October, we completed a facility expansion. The expansion added a second train of separation facilities and recycle compression. That will allow us to add CO2 handling capabilities. This expansion also allows us to place an additional 21 wells on production during this fourth quarter. So, we are also expecting some improvement in production there. Cranfield, our Phase IV CO2 project, continues to respond, increasing sequentially for three straight quarters for an average rate of 572 net BOEs per day. Delhi, our Phase V area, is progressing with the final tie-in of our CO2 supply lines to the facility. We could commission the 78 mile Delhi pipeline from Tinsley to the field, that’s all completed.

The pipeline is filled with CO2 to a pressure of over 1,400 psi, and the field should begin injection next week. Our expectations are to see our first CO2 enhanced oil production sometime around mid-2010. During the third quarter 2009, Jackson Dome increased and produced an average CO2 rate of 633 million cubic feet per day, approximately 10% greater than the second quarter average of 578 million cubic feet a day. We continue to invest capital to Jackson Dome area for infrastructure reserve growth and to improve CO2 production rates. Now, Tracy is going to talk a little bit more about the Jackson Dome expansion.

I will talk about some of the work we are doing on the ground there. During the third quarter, we completed a Barksdale to Brandon pipeline, which is a 14 mile, 20 inch pipeline. That pipeline was installed to allow us to transport CO2 from the fields South along the Northeast Jackson Dome pipeline and ultimately to the Green lines. So we're making that preparation. At the same time we did this work, we installed three coolers at the Brandon Pump Station, and that’s going to allow us to increase the CO2 volume that will be transported down the NEJD line South to above 600 million cubic feet per day.

We're also in the final stages of completing and commissioning the Trace Dehy Facility and some additional pipelines to interconnect some of the wells and dehydration facilities. These additions will further strengthen our CO2 production versatility and capability at Jackson Dome. Today, we probably have the capability of producing and transporting over 900 million cubic feet a day. I will move to the Green Pipeline, our biggest capital project this year. We have over 234 miles or 73% of the 320 mile pipeline that is now welded.

We have over 208 miles are covered, and we are now cleaning and restoring over 179 miles of right-of-way. Recall we started construction during the fourth quarter of 2008, and today we have 42 miles of pipeline welded in Southeast Texas. Construction is going well. Our timetable has not changed, and we expect to complete and commission the pipeline from Donaldsonville, Louisiana, to Oyster Bayou in the East side of Galveston Bay by the second quarter of 2010, and then complete it up to Hastings by the end of year 2010.

Mark mentioned LOE, I will touch briefly on CO2 LOE cost as they relate to our tertiary. Those costs increased about $2.40 per BOE. Most of this unit cost increase was due to some well work and work over expenses, approximately $0.80 per BOE. Now often during the facility shutdown we place an additional work over rig out into the field. Often we chemically treat. Since the wells are down, we treat these well bores or we perform a general maintenance in the field.

So, some of that work was done. We also increased the volume of CO2 during the period. And in CO2 volumes and price accounted for approximately $0.57 of that increase. Then our rental equipment or our lease purchase agreements increase increased costs by about $0.30 per BOE. We will go into more detail on our capital, but I thought I would bring you quickly just an outlook of 2010. Capital investments on the existing assets will be much different than the current 2009 budget in the terms of investment profile. In 2010, capital investment strategy focuses on our core business that’s CO2 and EOR project, with nearly 70% of the 2010 capital budget getting invested in wells and facilities, while pipeline construction will dropdown from its current 60% to 70% in 2009 to less than 15% of our total capital in 2010.

Capital allocations will place most of the investment in into those larger EOR projects that deliver a better rate of return on capital investment and also prepare us for future success in 2010 or early 2011. Projects such as Tinsley and Delhi and Heidelberg should deliver production increases during 2010 while we develop our Gulf Coast properties, Hastings and Oyster Bayou and other properties along the Green Pipeline. They will receive capital funding at levels about a $100 million to ensure that they will have performance in 2011. But we will more details, capital investments next week. We will also try to combine both Denbury and Encore in that capital. With that, I will turn it over to Mr. Tracy Evans.

Tracy Evans

Thanks, Bob. I'm going to give you a brief update on our CO2 source efforts that we've been working on during the year. During the third quarter, as Bob mentioned, we have finished drilling, completing, and testing the [Kruger] Trust 3516 number one; that is a well in (Inaudible) field. Based on the results of the open hole logs and the testing we have down, we were able to book an additional 358 Bcf of CO2 during the quarter. The 358 Bcf of CO2 represents plus or minus 140% of our replacement of our expected CO2 during 2009.

In addition to the [Kruger] well, we have made substantial progress on our leasing efforts of two additional structures within our latest 3-D seismic survey, and we expect to begin drilling in early 2010. These two structures contain the majority of the 3 Tcf of probable CO2 that we discussed during our public presentations. These geologic structures have geophysical attributes that are very similar to all of our existing producing structures and with the [Kruger] well proving up CO2 to the lowest structural subsea depth. Today in the Jackson Dome area we are cautiously optimistic on developing the additional CO2 from these structures.

Just to make a note that [Kruger] well, although drilled several hundred feet downdip of the existing well on the [Gluckstein] structure, did not encounter any sort of water contact. We expect to keep one rig drilling in the Jackson Dome area during 2010, drilling these structures discussed above and continuing to develop existing producing structures as well. We are confident that our efforts in the Jackson Dome area will provide additional CO2 beyond what is needed in Phases 1 through 8, which we can then use for further expansion throughout the Gulf Coast area.

In addition to our efforts in Jackson Dome developing our natural CO2, we have continued to pursue the manmade supplies of CO2 as well. Our communications and discussions over the past several months with many of the proposed gasification projects, discussing their plans, indicate that they are making progress, although no projects have broken ground at this point in time. The efforts by many of these projects appear to be moving the projects forward as they are filing permits, they are in their DOE Loan Guarantee Programs, and they are getting permits filed and making other progress as well.

Denbury is a sub awardee on four of the 12 DOE grants recently announced during the FOA 15 round of offerings for the industrial use and sequestration of CO2. Through these four projects or in conjunction with existing emitters of CO2, and that's assuming successful completion of negotiations with the Department of Energy and NETL, it appears we are getting closer to receiving anthropogenic volumes of CO2 into our system. We continue to work with several other emitters in which we collaborated with during that FOA 15 round of offerings and continue to believe that we will be able to capture and utilize CO2 from these industrial sources in the very near future. And with that, I will turn it over to Phil.

Phil Rykhoek

Okay. Thanks, guys. Amy, if you want to come back on and we will take some Q&A.

Question-and-Answer Session

Operator

We will begin now begin the question and answer session. (Operator Instructions). At this time, we will pause momentarily to assemble our roster. Our first question is from Mike Scialla with Thomas Weisel Partners. Please go ahead, sir.

Mike Scialla - Thomas Weisel Partners

Question I should have asked you the other day after the acquisition, if I can go back to that, on those CO2 sources in the Rockies. You alluded to there are some naturally occurring sources there that have not been tapped. Just wondering, have those been identified or have they just been off-limits? And why do you think Denbury can get their hands on it?

Tracy Evans

Well, a lot of the natural sources we're talking about there are the sources of CO2 that are produced with natural gas. A lot of other people refer to those primarily as anthropogenic, but it's coming out of the ground just like the natural gas. So we may have confused people a little bit in that regard.

Mike Scialla - Thomas Weisel Partners

So this is similar to like a La Barge situation, but?

Tracy Evans

Right.

Mike Scialla - Thomas Weisel Partners

In addition to La Barge?

Tracy Evans

Right.

Mike Scialla - Thomas Weisel Partners

And then looking at your tertiary volumes, if I am calculating things right, it sounds like from what Bob was talking about you, you're looking for some additional ramp between now and the end of the year, say 500 barrels a day or so. Is that fair?

Phil Rykhoek

We're actually, the last couple weeks of October, we are already in that 25.5to 26, and in the last week I think we've been running just a little bit over 26, which I think is about where we need to be to meet that annual forecast. So we're pretty much there.

Tracy Evans

Particularly Heidelberg should perform for us.

Mike Scialla - Thomas Weisel Partners

And if it does continue to ramp, I guess between now and the end of the year, just looking at the numbers. So you get to 26.5or so, and then looking at your production guidance for next year, doesn't look like you're projecting a whole lot of growth above that number for an average of 27,000 next year. And I was thinking that we're going to see more growth out of Tinsley, Heidelberg. You will have Delhi coming on. Soso and Lockhart I would think are still increasing. Do you think you are being conservative, or is there an underlying decline? What is the decline I guess what I am after Little Creek and Mallalieu, are they declining the way you would expect?

Tracy Evans

I think, obviously, Mallalieu the way we expanded the facility there, we do expect to see some declines there. Little Creek has been on decline for really the last year or so, too. So, those will continue. The growth, obviously, you are correct in the fields that we expect to continue growing. But one of the issues is we have not spent a lot of money in 2009 on many of these projects, other really then Heidelberg and Tinsley and as you mentioned, Delhi. And so, we really have growth in those two larger fields offset by some flattening of some of the existing fields. And then also you have the decline.

Delhi, although we do expect it to respond midyear, those are not a significant number of volumes now. Historically we have outperformed the early, results at most of our fields, so it's definitely possible that Delhi could provide a little upside to us.

Phil Rykhoek

Yes. If Delhi responds mid-year, it's just not going to be material to the annual average, although it should continue to ramp up all the way through December.

Mike Scialla - Thomas Weisel Partners

And what is the current rate at Mallalieu?

Tracy Evans

Third quarter rate?

Phil Rykhoek

It was 3679, third quarter average for Mallalieu.

Mike Scialla - Thomas Weisel Partners

And that is going to continue to decline all next year, even with the recycle capacity up to 230 million a day on that?

Tracy Evans

I would put it more on a flattening. I think you are going to see a flattening. We are doing a lot of different things in Mallalieu to try to flatten it. The units have been in operation for seven years, and it's only natural after seven years that you see some flattening and some decline. We also have some [D-sand] or another sand that we are trying to look at how we could exploit that. So, there's a lot of moving pieces at Mallalieu. So, I think we have it more of a flattening to declining, to decline forecast.

Phil Rykhoek

It's relatively flat, maybe a very slight decline this year.

Tracy Evans

In 2010.

Mike Scialla - Thomas Weisel Partners

Can you say at this point, where it's tracking in terms of what you think it's going to recover in terms of the incremental original oil in place?

Tracy Evans

There is no doubt.

Bob Cornelius

Those are the proved reserves, Mike, are still in the plus or minus 20% range. We still expect it to even go higher than that. I mean even at this third quarter rate, you look at it, it still has barely a four year reserve life, which is extremely short for these kind of assets. So, we just got to get a few more of the phases, get their decline sorted out and see exactly what they're going to project. But I would expect over the next year or so to see some up tick in the recovery factor than what’s currently booked.

Phil Rykhoek

This plateauing is not unexpected. This field, we have been flooding it now for what? About seven years.

Tracy Evans

Seven years.

Phil Rykhoek

And that’s actually when we usually not upon average expect fields to start to plateau; and then they decline a little bit. The initial decline might be a little bit strong, but then it starts to really level out and be a slower decline for many, many years thereafter. So, Mallalieu is still going to be a good producer for some time.

Mike Scialla - Thomas Weisel Partners

And then just one last one for me and I'll get back in the queue. On your capital expenditures, if all those lease sales, the lease buybacks don't go through this year, does that change the CapEx number for this year? I guess, I am not completely clear on what the cash CapEx is likely to be if those push into 2010?

Mark Allen

Our original projection, the 750 was really what we would expect to incur during 2009, and that was net of capitalized interest and assuming $100 million in sale-leaseback transactions. So, through September 30, we had about $45 million of sale-leaseback transactions complete. So yes, if we do not get the rest of the $55 million complete by the end of the year, it would have some effect on that 750 number. And as I laid out in my comments, could have some impact on our debt level as well.

So, they all flow together. I guess the other thing that I want to make sure people understand that when we talk about the $750 million incurred, we look at that as what we incurred during the year. And when you look at where we were at the end of 12/31/2008, we had a big liability for capital that we had incurred through 12/31/08, that is going to run out of our cash or cash expenditures during 2009. And if you recall when we did our liquidity slides earlier in the year, we estimated somewhere between $50 million to $100 million of liquidity outflow from the cash outflow related to those capital expenditures.

So that's what I was referring to when I walked back from the $833 million in terms of just cash spend thus far and subtracting off the capitalized interest leases and then the liability runoff from 12/31/08.

Mike Scialla - Thomas Weisel Partners

And then I guess one last follow-up that in terms of the overall cost for the Green Line, have those changed at all?

Bob Cornelius

We're evaluating that right now. We're doing pretty good. We are probably only about 40, 45 miles from the East side of Galveston Bay. We do have to get bids in on Galveston Bay. Because of the Hurricane Ike, we suspended that. We have just completed a survey of a bottom of the bay survey, we are working that. So, until we get those results in, we can't firm up our bid there. Then we're also looking at the contractors on the East side of Galveston Bay. So we've got to get those in.

Phil Rykhoek

Yes, bottom line, we have two bids left to get. We still have the same estimate, though. But we will let you know if those bids vary significantly from what Mark's projecting.

.

Operator

Our next question comes from Nicholas Pope with Dahlman Rose. Please go ahead.

Nicholas Pope - Dahlman Rose

Just could you break out like the Mississippi, the non-CO2 floods, what that production was during the quarter?

Tracy Evans

Give us a second.

Bob Cornelius

Yes, just a second.

Nicholas Pope - Dahlman Rose

And I was also just because you made the comment in the press release about Selma Chalk, like I don't know if you have that broken out as well. I would just be curious what portion of that it was.

Phil Rykhoek

I'll give you the total, the Mississippi non-CO2 floods was 8,931. Selma Chalk, does someone have that?

Mark Allen

We can give you an average.

Phil Rykhoek

Well, Mark has it. Bear with us one second.

Nicholas Pope - Dahlman Rose

No problem.

Phil Rykhoek

Do you have any other questions we can --?

Nicholas Pope - Dahlman Rose

Yes. Just a little more depth on what Michael had asked on Mallalieu. Just looking at the field it looks like the first three quarters it's been down around 30% year-over-year each quarter. And so, like I was wondering, are you all expecting this to plateau in the range we're at in the third quarter? Or with all the work that's being done, you all expect it to get at least back to what we were seeing earlier in the year? In that like the low 4,000 range?

Bob Cornelius

I mean today it’s actually, since we got the facility expansion completed and on, our production is actually slightly up over for the third quarter. Now, obviously, we're still in the decline phase. So you're going to get this pop-up and then we'll see it start declining again. So, as far as probably, I think we have it forecast to be slightly above the third quarter.

Phil Rykhoek

If you look at the annual 2010 its pretty much flat with third quarter, really. But you have an increase temporarily, and then it is probably going to slip just a little bit again in 2010, but averaging about the same number as the quarter.

Nicholas Pope - Dahlman Rose

Then I guess end with the Green Line, with related to Green line. Once that gets started up, and you all mentioned or discussed it a little bit during that Encore call, but just with other fields that you are looking at, is that still in the plans to get some more fields to kind of fill in the other end of that Green Pipeline?

Phil Rykhoek

Oh, you bet. You bet. We are still very interested in several fields down along that corridor, and things are looking positive at Jackson Dome. I think we will prove up some of that probable reserves in 2010. As Tracy mentioned, we had such small increase this year, and that which we are very happy with, too. We only drilled one well. So we are still very interested in pursuing additional opportunities in the Gulf Coast, most definitely.

Mark Allen

The Heidelberg and Sharon gas production during Q3 is around 20 million a day versus 23 million there in Q2, so that was it.

Operator

We have a follow-up question from Mike Scialla from Thomas Weisel Partners.

Mike Scialla - Thomas Weisel Partners

I didn't expect to be back so soon, but it sounds like you're looping part of the NEJD line to the South. Is that correct?

Bob Cornelius

What we did is all the gas went through, it moved from the dehydration down to NEJD and down South. What we put this 14 mile line in, which is just straight line. It’s actually we just made a straight line, and that bypassed some of the industrial customers. So, we didn't have the friction losses in the pipe and then the takeoff from the industrials were now on another pipe. So, we will be able to improve the rate down the NEJD line by doing that, by taking off the industrial takeoff and by reducing the friction factors. So, well that’s working.

We also put a cooler on there, we increased the density. Remember, CO2 is pumped at the dense phase. So by putting a cooler on there we were able to increase the density of the CO2 or more molecules per square inch, so we were able to move more CO2 down to the South part.

Phil Rykhoek

We probably need to change our slideshow because I know it's not, we don't depict it this way on our maps. But if you envision, we put a Y at the top of the NEJD line to go to the different sites at Jackson Dome. And that Y allows us to bypass this. As Bob said, we bypass a lot of the industrial customers, so it gives us more throughput at the other end, at the bottom end.

Mike Scialla - Thomas Weisel Partners

Okay. Are there likely going to need to be additional expansions on that line? I am thinking in terms of when you get to your peak capacity flooding fields over in Texas?

Bob Cornelius

Well, we have got a pump station. Mike, as far as looping it the rest of the way, we are looking at additional pumps stations. Pump stations are where you go first. We have installed the first one; there is a possibility of installing a second one, more than likely at the Southern end of our Phase 1projects so we are using solid.

If we have to loop it, it will be because we have a lot of industrial emissions of CO2 coming from the North. But until we see that or develop a whole lot more gas at Jackson Dome, which is possible we won't have to loop it. [We] are going to do pump stations first and then you loop it.

Mike Scialla - Thomas Weisel Partners

Okay, so getting back to thinking in terms of, what is the capacity going to be on the Green Line? And what could be the need for Hastings and the other fields in East Texas?

Bob Cornelius

Right, that's an issue. If we need to get gas from Jackson Dome to Hastings, we would have to probably loop a portion of a NEJD line, if it all had to come from Jackson Dome.

Mike Scialla - Thomas Weisel Partners

Right, okay.

Bob Cornelius

At the same time, Tracy and his team are looking for additional CO2 emitters along the Green Pipeline between Baton Rouge and Hastings.

Mike Scialla - Thomas Weisel Partners

And these are exclusive of the liquids plants or others that you?

Bob Cornelius

Yes. These are current emitters.

Mike Scialla - Thomas Weisel Partners

Current emitters? And then I think I was oblivious to this somehow, but the 358 Bcf you added at Jackson Dome, where did that come from?

Tracy Evans

It came from the Gluckstadt field which is where we currently have, I think we release the name of the [Yandell] well. It's been a structure that we've had now for some time. We got around to drilling a second well after looking at the first well on it. We felt like a significant portion of the section might have been faulted out, so we stepped away from that well and now down structure, and then drilled it. And again we got all the way to the bottom of the Norphlet without seeing any sort of water contact. So, that created a larger area the way CO2 could be in, which actually dovetails very well with some of the P over Z data we were seeing as well. So we've gone through that with D&M and we are all very confident that that 358 is now a proved number.

Mike Scialla - Thomas Weisel Partners

That well was drilled in the third quarter?

Tracy Evans

Well, it probably started drilling in the second. It was drilled and completed in the third. Yes.

Mike Scialla - Thomas Weisel Partners

Right.

Tracy Evans

These are 90 to 120 day wells.

Mike Scialla - Thomas Weisel Partners

Right. Then you said, Tracy, that the lack of, or by not seeing a water contact there, that also helps set up the two larger structures. Do I understand you correctly there?

Tracy Evans

We continue to drill and Gluckstadt was deeper than the original structures. So, we are stepping down subsea-wise. But the seismic data shows the same signature that we see in all the producing Norphlet structures. And by pushing down the contact it just gives you more confidence that the CO2 will be at that subsea depth. And so on the largest structure I think the current well is about 100 feet below the top of that structure.

Mike Scialla - Thomas Weisel Partners

Have you seen any water contact in any of the structures that you've drilled so far?

Tracy Evans

Yes, we have. Most of our structures we actually have water contacts.

Mike Scialla - Thomas Weisel Partners

And has it been consistent from one structure to another or has it been variable?

Tracy Evans

No, it's been variable. And of course you've got to remember you're on, you have got an over pressured side and a normal pressured, so they are different. Within the same structure, yes, they are consistent. But you got to realize a lot of these large broad structures end up being faulted. But then sometimes those contacts don't match up.

Operator

Our next question is from Andrew Coleman with UBS. Please go ahead.

Andrew Coleman - UBS

I was a little late getting on the call, so I apologize if I ask something that you guys have covered. You can just tell me to check the transcript and I can grab it there. But three things have jumped out where it looks like, what is the rate at Jackson Dome right now?

Bob Cornelius

The rate at Jackson Dome, that's a loaded question, but our average rate at Jackson Dome is about 700 million cubic feet a day, because we work on Tinsley. But when we loaded the Delta Pipeline, we actually had rates of over 800 million cubic feet a day, and the team thinks that we could probably go to 900 million cubic feet a day. But the actual rate right now is probably about 650. But once we get on the Delhi it will be about 700.

Andrew Coleman - UBS

Was there a target at some point to get to 1 Bcf a day?

Bob Cornelius

Yes, we hope with the structures we drill next year and some of the more work that we are doing we will be about 1.2 Bcf by the end of next year, would be a goal that we have.

Andrew Coleman - UBS

1.2 Bcf? Okay. All right. And then the big up tick in LOE that I saw, that is a combination of the Barnett sale or I guess it's mainly the Barnett sale? Is that correct?

Phil Rykhoek

Yes, are you looking just Q2 to Q3?

Andrew Coleman - UBS

Yes.

Phil Rykhoek

Okay, because we were at, on a pro forma adjusted basis for Q2, we were at $19.90; and now we're at $21.22. As Bob walked through, a large portion of that is, is the CO2 or tertiary operations this quarter.

Andrew Coleman - UBS

So certainly then thinking about the next quarter, it will stay more on trend with the third quarter level, not necessarily go back?

Phil Rykhoek

Yes.

Andrew Coleman - UBS

And then last one there on the volumes for the quarter that was, I caught a little bit there on some Mallalieu issue. Why volumes had gone down as well as the Barnett sale. There are some liquids there with the Barnett, too, right?

Tracy Evans

Yes, there are liquids associated with Barnett. They're actually relatively significant. The Mallalieu discussion was over the fact that we had a planned facility expansion. It got done later than we expected due to some electrical issues. So that's one reason why it's down a little bit more than what we projected in the third quarter.

We've got the facility expansion done and so today we are back up. But for the third quarter that. Now, once we get, and we're going to have this pop up, but then Mallalieu is going to resume its decline. It's not going to be on an incline.

Operator

Our next question comes from Noel Parks with Ladenburg Thalmann.

Noel Parks - Ladenburg Thalmann

Just a couple things, with Encore having considerably more gas production than Denbury does, especially now after the Barnett size estimates, I was just wondering what the status was of your own gas marketing group? Did you basically hang on to any people after the Barnett Shale sale? Or the folks you are going to get from Encore, will they be able to pick up the slack just on a consolidated basis for the company?

Phil Rykhoek

No worries there, Noel. We kept our marketing team intact. We are keeping them busy. We may also pick up some people from Encore also. But our guys have experience at marketing both oil and gas, so there is not an issue there. We didn't make any changes.

Noel Parks - Ladenburg Thalmann

Just a couple details about the transaction. On the tax side, anything particular that we need to be aware of? I am assuming for example that Encore's carryforwards would follow with the acquisition. And I didn't know if there was any (Inaudible) and do you want to exchange options you had as a result of the Barnett shale and now buying Encore?

Phil Rykhoek

No, this is a corporate acquisition; and the Barnett was property.

Mark Allen

Yes. The basis will carry over and not necessarily in relation to the Barnett sale. I guess there is always some opportunities with sale of assets to look at that, Noel.

Phil Rykhoek

Going forward if we were to consider, we need to sell some to raise money. But we also could potentially trade things. That would also be interesting for us to trade for EOR projects or something. And perhaps you could do those under a 1031 exchange. But you can't go backwards to pick up the Barnett. That doesn't work.

Noel Parks - Ladenburg Thalmann

If you talk about G&A going forward, do you have a sense on just the timing and maybe the approximate size of acquisition costs that will find their way into G&A? I am thinking about legal and so forth in fourth quarter and first quarter?

Mark Allen

No, I would be guessing at this point. I would say legal fees will be extensive and accounting fees and preparation of the SEC documents, and obviously, advisory fees. They will be significant, and I would hesitate to give you a range at this point until we, or when they will come in, whether it's Q4 or Q1, until we get a little further into analysis of all those costs. But it is likely to be quite significant.

Operator

Our next question is a follow-up from Andrew Coleman. Please go ahead.

Andrew Coleman - UBS

I remembered it. I even wrote it down. But the question was, given that guidance for the tertiary side it was taken down slightly, looking at it, I think 12% next year, and of course all that’s going to change here in the next week, I imagine. But given the range over the next kind of four to five years of 10% to 20%, should we be thinking about the growth profile as inclining over the next three to four years into that target? Or should we be thinking as the new capital gets allocated that that number would probably go up next year?

Phil Rykhoek

If you look at it we didn't spend a lot of money on tertiary fields this year, as we have said. So, actually having a 12% increase year-over-year it looks pretty good from my perspective, because we spent such little money on tertiary floods. Going forward we expect 2011 to be a stronger increase and be more toward the upper end of that range. And there are some strong years after that too. So, I think this is just a one year; this is probably one of the lower years in the group, but it really relates back to the activity in 2009.

Andrew Coleman - UBS

Although then we also get tied to Jackson Dome, getting to that 1.2 Bcf a day by late next year?

Phil Rykhoek

Yes, although we've been generally ahead, the requirements that we have in our forecasts, we have generally been ahead at Jackson Dome. We've been able to supply more gas than we actually have needed at the fields. And we still are.

Operator

Our next question is come from Eric Hagen with Lazard Capital Markets.

Eric Hagen - Lazard Capital Markets

Just a follow-up. The 1.2 Bcf per day, is that what you will need to flood both Oyster Bay and Hastings? I mean in addition to what you are flooding now; is that the total capacity?

Bob Cornelius

That's the combined amount.

Eric Hagen - Lazard Capital Markets

Right, the combined amount, but that takes care of both those fields, correct?

Bob Cornelius

It takes care of everything that we have in Phases one through eight.

Eric Hagen - Lazard Capital Markets - Analyst

One through eight. The second one was in terms of Encore and they have this MLP structure, are there any fields in your asset base now that you think are appropriate for potentially dropping down into that?

Phil Rykhoek

No, we have sold off most of the non-core properties. We have a little bit of gas left, but I don't know that putting a gas property like the Barnett Shale or Selma Chalk makes a whole lot of sense in an MLP, because they tend to decline quickly.

Eric Hagen - Lazard Capital Markets

What about Mallalieu? If it's going to be relatively flat going forward?

Phil Rykhoek

Well, we would probably like to keep that in that parent. We like it. I guess we haven't thought through that completely because when you put us together and we have an MLP its consolidated production numbers, I guess. I guess in theory you could use it for financing. But that probably wouldn't be our first choice, though, to put tertiary production down there.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Phil Rykhoek for any closing remarks. Please go ahead.

Phil Rykhoek

Thank you, everyone. We know several of you have had questions regarding our announcement earlier this week about Encore. I just want to remind you that all four of us [representing] next Thursday and Friday that's a week from today and tomorrow at our analyst meeting in Jackson, Mississippi. At that time, we will present more information about Denbury, the Encore acquisition, more definitive numbers on the 2010 capital budget, and production.

The following Monday, Tuesday, and Wednesday we will be in New York and Boston presenting a summary version of that meeting, followed by one-on-ones in both cities. If the interest is high, we may even stay over for another day or two. We will have two management teams available up there so that we can meet with more of you. So if you would like to schedule a one-on-one at these meetings or check on any other trips that we have planned in the future, contact Laurie Burkes, our IR manager in our office.

We are very excited about this acquisition. We think that you will be, too, once you understand it better. Just as a 40,000 foot one-liner on a combined basis, we will have 500 million barrels of EOR upside from the fields in inventory, with millions or billions of barrels of additional potential in these two areas. So, we think that is a really neat future.

Thank you and we look forward to talking to you again next week.

Operator

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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